Markets Overreact to Dovish Powell Comments, Pricing in Premature Fed Rate Cuts Despite High Inflation
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A dovish tone from Fed Chairman Powell at the November FOMC meeting pushed markets to price in significant monetary easing starting in mid-2024.
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Markets seem to have overreacted, pricing in around 100 basis points of rate cuts for next year despite high and volatile inflation.
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The Fed is still grappling with how persistent inflation is, how fast the economy may slow, and where the neutral rate sits.
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The author believes the Fed will likely need to keep rates at current levels through most of 2024 to durably bring down inflation.
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This market reaction sets the stage for more volatility ahead as the Fed tries to stabilize inflation expectations.